A Victory for Choice and Competition in North Carolina

Pro-Choice

Anti-Choice

Earlier this week the North Carolina Supreme Court struck a blow for choice and competition in K-12 Education. In Hart et al. v. State of North Carolina and Richardson et al. v. North Carolina,  the Court rejected challenges to the state's Opportunity Scholarship Program in a well-reasoned opinion by Chief Justice Martin.  Like a similar program in Washington D.C. previously discussed on this blog, the program provides financial assistance --- $4,200 per student --- to low income families who choose to enroll their children in certain private schools.  Sometimes called "vouchers," such scholarships implement  the vision of Nobel Laureate Milton Friedman, who articulated the powerful case for educational choice in his now-famous essay "The Role of Government in Education," reproduced here at the website of the Friedman Foundation for Educational Choice.

North Carolina imposes various regulatory requirements on its non-public schools.  (See here).  In addition, schools that enroll students who receive such assistance must employ nationally-recognized standardized tests annually in the third grade and afterwards to evaluate the progress of students in "grammar, reading, spelling and mathematics" and submit the results of such tests to the State's Educational Assistance Authority. ("Authority")  Such schools must also provide the parents or guardians of such students with annual progress reports, including the results of standardized tests and inform the Authority of the graduation rates of such students.  A school that enrolls 25 or more such students must report the aggregate standardized test scores of such students to the Authority, and such aggregate scores are available to the public.     Schools that enroll such students cannot discriminate based on race, color or national origin.  Moreover, the Authority must annually retain an independent research organization to assess the "learning gains or losses" of students who receive such grants as well as the "competitive effects" of the program upon the learning outcomes of students who remain in public schools.  (See N.C.G.S. Section 115C-562.1-7, found here).  

The Authority selected about 2,300 students from more than 5,500 applicants to participate in the program in its first year, at a total cost to the state of $10.8 million.

Plaintiffs, backed by the North Carolina ACLU, raised numerous objections to program.  Most notably, the plaintiffs claimed that the spending authorized by the program did not serve a "public purpose" because some of the schools in which beneficiaries enrolled are not accredited by one or more accrediting agencies and/or employed some teachers that are not certified.  See North Carolina Constitution Article V, Section 2(1) ("The power of taxation shall be exercised in a just and equitable manner, for public purposes only, and shall never be surrendered, suspended, or contracted away.") Plaintiffs also made a related claim that the program failed to "guard and maintain" the privilege of education guaranteed by Article I, Section 15 of the state constitution.  Indeed, a lower court had ruled that the "General Assembly fails the children of North Carolina when they are sent with taxpayer money to private schools that have no legal obligation to teach them anything." (Emphasis added).

The North Carolina Supreme Court properly rejected these and other claims.  As explained above, the Opportunity Scholarship Program contains numerous features, including annual testing, reports of the results to the state, and annual progress reports to parents and reports on graduation rates that enhance the accountability of private schools to families and the public.  The most important such mechanism, however, is market competition, the institution on which free societies ordinarily rely to ensure the production of high quality products and services.  Such competition, bolstered by background rules of contract and tort law, includes rivalry among various private schools as well as rivalry between private schools and their public counterparts, including the State's 147 Public Charter Schools.  Contrary to the implication of the district court's reasoning quoted above, no North Carolina children "are sent" by the state to a private school. Instead, parents or guardians voluntarily choose such schools over the free public school, and any public charter school, the child is entitled to attend.  Many middle class families already have sufficient financial resources to choose private schools for their children, and the U.S. Constitution guarantees them that right.  The Opportunity Scholarship Program increases the number of competitive options available to low income families, thereby facilitating their participation in the same educational markets, and attendance at the same schools, that middle class families have enjoyed for decades. Absent some substantial market failure, and none is apparent, there is no reason to believe that educational outcomes will suffer.  Organizations such as the ACLU, which purports to stand for "choice" and even invokes the Statue of Liberty on its logo, would do well to reconsider prior opposition to such programs, opposition that, when successful, entrenches anti-liberty state monopolies subsidized by the taxpayers, many of whom would prefer to send their children to private schools.

To be sure, accreditation and professional certification can sometimes improve the quality of products offered by some market actors.  Any such improvements come with countervailing costs, however. Such costs include the out-of-pocket cost of compliance, the cost of monitoring such compliance, the reduction in innovation resulting from regulatory mandates, and the exclusion of otherwise qualified individuals from the occupation in question.  See generally Milton Friedman, Capitalism and Freedom, Ch. 9 (1962).  At the same time, many markets for complex products function quite well without such governmental intrusion.   No certification agency decides what apps Apple will include on its latest I-Phone or whether and how Amazon will attempt to compete with Wal-Mart.  Indeed, Wake Forest University, founded in 1834, was first accredited in 1921. Davidson, founded in 1837, was first accredited in 1917.  So far as this blogger is aware, faculty who have taught at such institutions were never "certified" by any independent body.  It's hard to imagine that these institutions did not serve "public purposes" until 1921 and 1917, respectively.

Presumably the North Carolina Legislature understood the role that markets play in ensuring educational quality and took account of the costs and benefits of additional regulatory intrusion.   The legislature obviously decided that, on balance, the Opportunity Scholarship Program enhanced the public welfare by facilitating individual choice, bolstering educational competition and enhancing educational outcomes. Indeed, the State has long declined to impose stringent regulatory oversight on its private schools, trusting market competition to assure quality, and the Opportunity Scholarship Program imposes additional regulatory requirements on those schools that accept scholarship recipients.  As Chief Justice Martin eloquently explained for the Court, this determination was a quintessentially legislative judgment and, of course, subject to legislative revision as new facts about the operation of the program become available.  Hopefully the Court's decision will clear the way for an expansion of the program and thus additional reliance upon choice and competition in the provision of education in the Tar Heel State.

How to Monitor Apple's Monitor

Suspicious of Monitors

 

Section 1 of the Sherman Act forbids "contracts in restraint of trade or commerce among the several states," while Section 2 forbids  "monopolization" and "attempts to monopolize."  The Act also requires the Department of Justice to enforce the Act, by seeking, where applicable, equitable and legal relief in U.S. District Courts against firms and individuals who have violated the Act's provisions.  It appears that the Department may have used this authority to impose, no doubt inadvertently, the very type of monopoly pricing the Sherman Act was designed to prevent.

This last July the United States prevailed in a civil suit that challenged Apple's alleged agreements with book publishers to maintain e-book prices above the levels that unbridled competition would produce.  Among other forms of relief, the United States sought and obtained from the U.S. District Court for the Southern District of New York the appointment of a so-called "External Compliance Monitor," in addition to a new "Internal Compliance Officer," both, of course, at Apple's expense.  The final judgment requiring these appointments did not provide for competitive bidding to set the fees of either monitor but instead simply provided that the monitors would charge a "reasonable" fee. 

In paper's filed the day before Thanksgiving, Apple informed the court that the External Monitor, charged with ensuring that Apple comply with the antitrust laws, is himself charging Apple $1,100 per hour, as well as an "administrative fee" of fifteen percent, for a total of $1265 per hour.  Apple claims that it has never paid such high legal fees.  (See here for a more detailed summary of Apple's objections.)

If Apple's assertions are correct, the government's insistence on such a monitor on the terms described above is supremely ironic.   After all, as explained in previous posts (see  here and here), the whole point of the Sherman Act and its Rule of Reason as articulated in Standard Oil v. United States, 221 U.S. 1 (1911) is to prevent contracts (Section 1) or other practices (Section 2) that produce or maintain monopoly or the consequences of monopoly, without any offsetting efficiency benefits.  These consequences, of course, include prices above those that a competitive market would produce.  By winning the appointment of an External Monitor, against Apple's will and without competitive bidding, the Department of Justice has created conditions conducive to the very sort of competitive harm the Sherman Act was designed to prevent.  To be sure, the monitor's fees cannot themselves violate the Sherman Act, which only regulates "trade or commerce among the several states."  Like the Commerce Clause itself, the Act assumes the existence of pre-existing commerce  that parties might restrain. (See also here and here).  The District Court's coercive (but apparently legal) requirement that Apple purchase legal services against its will does not seem to qualify as such commerce.  Moreover, the terms of the final judgment would authorize Apple to seek a judicial determination that the External Monitor's fee is unreasonable.    However, as William Howard Taft explained long ago in his most famous judicial decision, see Addyston Pipe and Steel Co. v. United States, 85 F. 271 (6th Cir. 1898) (Taft, J.),  judicial oversight of pricing decisions is a poor substitute for the determination of such prices by a competitive market, there competitive bidding by pipe producers.  Judges who take on this task, Taft said, "set sail on a sea of doubt," and rely upon their own "vague and varying opinions" regarding "how much, based on principles of political economy, men ought to be allowed to restrain competition."  See id. at 282-84.  See also National Society of Professional Engineers v. United States, 435 U.S. 679, 692-94 (1978) (describing competitive harm resulting from horizontal agreement not to engage in competitive bidding).

This Blogger has no doubt that the court-appointed External Monitor is a superb attorney who is highly-qualified to perform the duties described in the final judgment.  Moreover, there is no indication that, in setting his fee, the External Monitor has acted in anything other than complete good faith.   Nonetheless, as the Roman poet Juvenal (pictured above) asked, admittedly in a different context, "sed quis custodient ipsos custodes," viz. "who will monitor the monitors themselves?"  The best such monitor, as William Howard Taft explained, is competition.     

How To Inject Real Competition Into the Health Insurance Market

(R-Ohio)

Liked Competition

(D-Illinois)

Pretends to Like Competition

The Richmond Times Dispatch editorial board has identified (yet) another contradiction in President Obama's plans for health care reform. On the one hand, the President and his supporters claim that they want to inject more "competition" into the nation's health insurance markets, by creating a so-called "public option." At the same time, none of the bills proposed by President Obama's allies in Congress would amend laws that both exempt insurance companies from federal antitrust laws --- which are supposed to encourage competition --- and empower states to block competition that might take place across state lines. The brief editorial, which is worth reading in full, can be found here.

http://www2.timesdispatch.com/rtd/news/opinion/editorials/article/ED-COST30_20090729-190409/282857/

The chief culprit here is the McCarran-Ferguson Act, which Congress passed in 1945 in response to the Supreme Court's decision in United States v. South-Eastern Underwriters, 322 U.S. 533 (1944). Southeastern Underwriters held that the Sherman Antitrust Act (named for its sponsor, Senator John Sherman, R-Ohio, pictured above) applied to the business of insurance and banned a horizontal price fixing agreement between insurance companies selling insurance across state lines. The decision was correct and made perfect sense. However, in its infinite wisdom, Congress responded to the decision by passing the McCarran-Ferguson Act, which, among other things, granted antitrust immunity to insurance companies who are regulated by state insurance authorities. The only exceptions to such immunity are for instances in which the company engages in "boycott, coercion or intimidation." McCarran-Ferguson was one of several New Deal-era federal statutes that undermined competition by encouraging price fixing and creating barriers to entry. Another classic example is the Motor Carrier Act of 1935, which required anyone wishing to transport goods across state lines in a truck to obtain a federal license to do so. The Act also empowered the Interstate Commerce Commission to sets prices for such transportation and pass on truckers' applications to serve particular routes. Put another way, the Act empowered the ICC to engage in Central Planning of the trucking industry.

Thus, so long as insurance companies are subject to state oversight, they may engage in the sort of horizontal price fixing that would be a felony if practiced by, say, automobile manufacturers. They may also engage in exclusionary tactics that do not rise to the level of "boycott, coercion or intimidation." Moreover, such companies can merge with one another with impunity, thereby producing concentrated markets without regard to whether such concentration is necessary to produce efficiencies. As the Times-Dispatch editorial notes, 94 percent of state insurance markets are "concentrated" if one applies Department of Justice Merger Guidelines. The problem is compounded in this context, where, because of McCarran-Ferguson, insurance companies can agree on the prices they will charge consumers without any threat of liability under Federal law.

Ordinarily, concentration itself it not necessarily a problem, since the threat of new entry can sometimes prevent firms in concentrated markets from raising prices above the competitive level. If, say, Dominos and Pizza Hut agree on the price of delivered pizza, Papa Johns and others can enter the market and defeat the cartel. However, McCarran-Ferguson empowers a state to prevent entry by out-of-state insurance companies into the state's own market, thereby preventing consumers in, say, Virginia from seeking health insurance from firms based in New York. In the end, then, McCarran-Ferguson is a sort of one-two punch: insurance companies may agree on prices they will charge consumers in a particular state, and consumer may not seek to avoid such price fixing by seeking insurance elsewhere.

There are various ironies here. The Obama administration and its allies generally support, or claim to support, aggressive enforcement of the antitrust laws. At the same time, they have made no effort to undo the pernicious anti-competition effects of McCarran-Ferguson. Moreover, some arguments for the so-called "public option" rest on the assumption that the Federal Plan will become so large that it will have bargaining leverage over providers of health care, an assumption in tension with a professed desire to enhance competition.

There is final irony. President Obama and his allies claim that failed markets justify additional government involvement in the health care industry. In this case, however, the problem seems to be failed government. To quote the Times-Dispatch:

"The market gets blamed for a lot these days, but it is absurd to pin high health insurance premiums on markets when excessive regulations are much more culpable. Any health care overhaul should repeal the ban on interstate health insurance shopping."

Enough said !